IPO Hype-Miracle Gets Crushed by Reality

“Retail funk” is what Container Store CEO Kip Tindell blamed the comparable-store sales on: they’d declined 0.8% in the quarter. In the earnings announcement yesterday after the close, he was pointing the finger at his customers – strung-out Americans who have other priorities:

While consumers are buying homes and automobiles and even high ticket furniture, most segments of retail are, like us, seeing more challenging sales than we had hoped early in 2014 – so we’re not alone in this.

They’re indeed buying automobiles, supported by bubble-subprime lending with vertigo-inducing loan-to-value ratios of 150% and 7-year loan terms. But they’re NOT buying homes, not in large enough numbers, to the point where the Fed has commented on it. Tindell just hadn’t had a chance yet to read the news.

And they’re not buying enough at the Container Store. Total sales rose 8.6% to $173.4 million, but with new stores opening up all the time, sales at stores open for a year or longer declined. That’s bad for a supposedly fast-growing company that had just gone public.

The Container Store has been around since 1978, but in July 2007, at the peak of the prior credit bubble, private-equity firm Leonard Green acquired most of it. On November 5, with the IPO market once again doused in exuberance and hype, it was time to unload. The IPO price, set at $18 per share, then doubled behind closed doors. The first trade took place at $36 per share. That’s what everyone wants. Not 25% a year, risk free, as the stock market seems to promise. Any index fund can do that. But 100% in the wee hours before trading even starts, now that’s something! Only Wall Street benefitted.

It’s not unique in this IPO bubble. What a blast we’re having.

Yet, the company cranked out losses in 2012 and 2013, and it still doesn’t know how to make money; it announced another $3.6 million loss yesterday, after having lost $4.8 million in the prior quarter. Red ink as far as the eye can see. For a retailer, not some social media outfit that hasn’t figured out its business model yet!

After the behind-closed-doors 100% miracle, the stock soared to $47.07 in two months. But with the New Year, the hot air began hissing out of that bubble. Today, it closed at $24.86, down 47% from its peak six months ago. Reality has set in. And reality is that its customers are strung-out Americans with other priorities. So Tindell lashed out at them:

 We thought our sluggish sales were all because of weather and calendar shifts that began last November and continued into the spring, but now we’ve come to realize it’s more than weather and calendar. Consistent with so many of our fellow retailers, we are experiencing a retail ‘funk.’

He feebly tried to make people feel better about having overpaid for the stock after it started trading and throughout the run-up before Wall Street took its money and ran. Hype meets reality.

Tindell had some corporate blah-blah-blah for these folks, packaged together with tidbits about a weak economy: “We are confident that customer enthusiasm for our brand, and employee morale are at all-time highs, yet we continue to experience slight traffic declines in this surprisingly tepid retail environment.”

“Tepid retail environment?” Wasn’t it tepid last November and December as well, when the IPO went airborne? Nope, it wasn’t tepid; it was terrible. But these details don’t stop the hype-mongers on Wall Street from pumping. Now, all that remains is hope:

We believe we’ll have a slight improvement in the second and third quarters. But we are very much looking forward to the fourth quarter as we comp against the worst weather we had in our history last year and believe we will see marked improvement in our sales trends.

Escape velocity? As always, only six months away. Just be patient! Note the word “believe.” He boiled it down to faith.

Alas, the decline in traffic is actually worse than the decline in same-store sales. Tindell was bragging about “average ticket growth.” The average customer spent 5.6% more per ticket, or 4.2% more at comparable stores. Despite that increased spending per customer – a sign of inflation – comparable-store sales dropped 0.8%. So comparable-store traffic dropped 5%?

Tindell admitted that much.

The company is struggling in a tough retail environment. It’s a difficult business. Consumers at the lower 80% of the income spectrum have seen their real wages decline – the lucky ones to have wages. They face soaring college expenses for their kids and soaring medical expenses for themselves. College grads are buckling under the weight of their student loans. There are many reasons why selling to the lower 80% is tough in this Fed-engineered economy where it’s only good at the top.

What’s chilling is the hype with which IPOs are launched during bubbles. We’ve been through this before. We’re going through it again. It’s a ingeniously designed wealth transfer machine. It transfers wealth from those who end up with these stocks in their conservative-sounding mutual or index funds to the players that made it happen. The technical term for this machine? “Healthy IPO market.”

Senior bankers are “privately warning” that the record bank lending binge “should not be seen as evidence of an economic recovery.” Instead, they’re fretting about the greatest credit bubble in history. Read…. Senior Bankers Warn: ‘It’s Crazy, It’s a Boom, It’s a Gold Rush’

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